Reading an NYT article http://www.nytimes.com/2016/01/09/business/dealbook/asia-china-renminbi-currency-devaluation.html?&moduleDetail=section-news-0&action=click&contentCollection=International%20Business®ion=Footer&module=MoreInSection&version=WhatsNext&contentID=WhatsNext&pgtype=article
There seems to be an oddity that I haven’t figured out yet. Later in the article, it talks of a front of worry for global investors: A potential wave of currency devaluations among… South Korea, Singapore and Taiwan. This would, for ForEx specialists say, put a damper on global growth expectations.
This doesn’t add up entirely. If these are primarily export-driven economies, and their currency devalues (I will put aside the fact they control the exchange rates, which is a distortion itself), should this not, as general macroeconomic theory would have it, encourage two behaviours? Those being:
- Make their goods less expensive for export, in other countries with stronger currencies, thereby shifting demand towards those goods and increasing the export volumes and thereby incoming revenue in trade
- Make their domestic goods more attractive to their citizens, thereby encouraging domestic investment, domestic consumption and domestic growth, and discouraging imports, thereby strengthening the value of their currency over time?
It strikes me that this is how the market is supposed to work when it comes to ForEx effects on supply and demand, but the commentary of these investors seems to state that it either won’t, or it affects things in ways they don’t believe have value.
Assets would be CHEAPER in these countries with devalued currencies, which I would think would herald a buy opportunity for such globally exposed investors, if they are value investors looking at the long term. The article goes on to say these countries “… have some of the most overvalued exchange rates on the planet…” which says this would be a natural, free-market rebalancing that these global investors should welcome unless they are ALREADY invested heavily in these countries, and such a move towards free market exchange rates or at least a rebalancing would damage their holdings.
Given that, it would seem the commentary is out of self interest, and has little to no bearing on the actual global growth expectations, except that these people would be taking an on-paper haircut, and only based on the valuation of these assets in say US dollars. This may lessen investment as they have lower asset values to spend and invest, but then, if the prices go down in these markets, doesn’t that then encourage the investment? Isn’t this the tenet of microeconomics that gets applied to investment and market justifications ad infinitum? It is a gross simplification and market inelasticities also distort the effects, but the fundamental theory is supposed to still apply, or these investors are selling us a bill of goods that includes various bridges over deserts when these mantras get imbued into populist thought and political policy.
The later notes by actual analysts makes sense to me. The slowdown in China is not so much a cause as an indicator that the global economy has cooled. I think a segmented comparison would be more useful and attempting to correlate the exports to the segments in the north american and world markets that are slowed as drivers (retail, probably many others) and which are not, as the American economy is in the lead again, so it would seem some of it is driving forward and perhaps it’s not all based on consumerism Wal*mart type expenditure? There’s a gap there that isn’t, as usual, being examined by any mainstream media I’ve seen so far.
This gives rise to a somewhat follow-on thought that is related, but not directly to the NYT article that formed the trigger for the post.
Is the push over the last thirty plus years for increasing globalization and the concurrent hyper-focus on that created a brittleness and over-exposure akin to the 2008 financial crisis, which, from a certain perspective, was created by chasing higher returns in a saturated market and creating value where there was none, and getting investment into that non-value to the point that when actual value needed to be realized, the chain collapsed on itself, also happened in global trade?
Basically, the extreme rush to offshore in the late 90s and much of the 2000s most likely, given the speed of investment and information now, overshot the balance point, and probably by more than a little. It was aided in overshooting the mark by these export economies, which includes India and others beyond the SE Asia PacRim countries, not having their exchange rates actually react to the growing costs and standards of living in at least some of their populace, and concurrently in the value of commerce going on in their GDPs vs. the rest of the world. Thus when their currencies should have appreciated given a free exchange rate (something China should have experienced over a decade ago, not only recently), caused the value in these economies to be grossly distorted downwards and thus create an artificial value in offshoring to the point that the actual realization of that value isn’t there anymore. Simply put, I am proposing that it should not cost as little as it does to manufacture in these countries, because their GDPs grew to the point that their exchange rates should have made their currencies stronger and investment in them less attractive.
This presents a conundrum in my thinking though, as it is the investments already in place that are out of alignment. They were bought at certain values, hypothetically, and have grown as the currencies were pegged to the dollar and they appreciated in value. But the exports were buoyed along by the fact the Chinese renminbi was also pegged artificially, and thus the real market valuation was absent from influencing the economies.
So now you have the renminbi, which was artificially low due to zealous and continuous capital spending in China, now facing a devaluation as an unintended consequence. The economy is in a state of over-investment due to very loose capital management by China and the bank(s) there. So investments have been made that really should not have been as there was no realistic possibility to have it paid back (sound like a mortgage-backed security parallel to you as much as it does to me?), so there are billions of dollars of companies, jobs, and exports that simply don’t make enough money to pay their loans or stay afloat. So they should have gradually died off over the years as the costs went up in China. But with the pegged exchange rate, they didn’t. And if they all do now, you will have civil unrest the level which would make Tiananmen Square look like a church group picnic. So China is stuck, and all those that ran headlong into the China craze rush are also, indirectly, stuck in very poor investment positions, as the renminbi now has to reflect the global economy and the Chinese economy, and in doing so, devalue the crap out of itself, the investments in China, and consequently take all these other export economies which were defended by the distortion in a counter-intuitive way down with it.
This is where I have more thinking to do unless someone can point me the way forward, as all of these economies should have their exports made more attractive by devaluation, but the global nature of investment has made it so ForEx exposure is now distorting the market adjustments because the money is coming from the stronger economies, and they don’t want those previous investments dropping in value, and do not have the same interest in new investments.
Of course, if there were enough freedom and diversification in the investment market, what should happen is that NEW investors come in at these lower prices to buy in, and the existing investors either ride it out, average down by investing more, or take the loss and get out as the devaluation occurs (or in advance if they can, and sell to markets where their currency will not devalue in relation to the one in question).
The more this gets exposed, the less I think most people, and even investment analysts, understand the intricacies of an integrated global economy. It’s not all wine and roses, and will not be without a world government and unified economic policy, which would be horrendous and inflexible, and evolve to be very inefficient. The diversity is the value, and the pain. it’s what drives things forward and makes it robust. But when you bank on a current state and bet it all and do everything in your power to enhance and propagate it, you distort it, and its relationship to other states.
Then you get a collapse rather than a gradual shift. It’s the difference between investment bankers, and biological systems. Biological systems are not fully optimized and efficient. They are robust, inefficient, and most important of all, fault-tolerant. That’s why species survive most catastrophes, and grievous injury and disruption, and our economic systems increasingly don’t. They have the robustness optimized out. That’s the risk that the investors want legislated away and bailed out, but it can’t be without creating new inefficiencies.
Back to the article, as sums up at the end though, many of those investors were dollar-based, which supports my theory and they are looking to get out before it devalues any further, or starts to devalue rapidly. The pegged currencies created a fragile, distorted exchange rate and concurrent investment environment. Unwinding those situations at this point looks like it will be very painful for the emerging economies.